Adidas suppliers seek redress from contract termination

Updated: 2012-08-01 08:03

By Xie Yu in Shanghai (China Daily)

Chinese suppliers are calling on the clothes manufacturer Adidas AG to compensate them for terminating contracts, saying that they might otherwise turn to the courts for assistance.

Adidas announced its plan to close the factory last week, saying it will shut down an apparel operation in Suzhou, Jiangsu province, in an attempt to become more efficient by restructuring its business in China and the world. It also said it will terminate its contracts with five suppliers in the country.

Those companies have been working with Adidas for several years. In 2011, they delivered about 8 million garment pieces to Adidas, said Sun Yingli, general manager of Shanghai Manlang Textile Co Ltd, one of the suppliers.

Sun said Adidas informed her and her colleagues in April that it wanted to end the contract it has with Shanghai Manlang Textile.

"The original document said Adidas can terminate it whenever they want," Sun said. "They just have to tell us about that decision six months in advance."

Sun said she has consulted a lawyer and said the contract appears to be a one-sided agreement.

About 30 percent of what Shanghai Manlang Textile produces is intended for Adidas. Other suppliers are in worse positions, having no other clients apart from Adidas.

"Some machines and software systems are tailor-made for Adidas," Sun said. "They will be useless if we stop working with that company. What's worse, I'll have to lay off workers. Other companies may even go bankrupt."

On Tuesday, Sabrina Cheung, corporate communication director for Adidas Greater China, said China will remain an important source of supplies for the company.

Cheung said the company's decision to close its last wholly owned factory in China will not lead to a decrease in production in the country. She said the company works with more than 300 suppliers in China.

Cheung said Adidas gave its suppliers fair legal notice of its intent to terminate the business contracts it has with them. She said the company has fulfilled all of its contractual obligations but will nonetheless offer its partners advice pertaining to their communication and transition plans.

Sun said Manlang Textile and the other operations affected have not received assistance from Adidas.

"I hope we can sit down and negotiate a resolution as early as possible," she said.

If none is forthcoming, she and the other suppliers will turn to the courts, she added.

Labor costs in China are now more than twice as high as those in Bangladesh and Vietnam, Xinhua News Agency has reported.

Sun acknowledged that labor costs are low in Southeast and South Asia. Still, she said, China has clear advantages.

"The industrial chain is very advanced in China," she said. "You can find any kind of materials you need very quickly here."

Moreover, manufacturers that want to sell in the Chinese market will pay lower shipping costs when they also make their products in the country. Even so, she said her company has had trouble drumming up business from new clients this year.

"The global economic situation is not good," she said. "What's more, the US economy is reviving and taking away some of our clients."

Xue Shengwen, a senior researcher with ChinaVenture Group, a research and consulting company, said the largest obstacle that China's manufacturing industry must contend with is the increasing cost of labor.

China, when compared with some Southeast Asian countries where labor costs are low, is rich in the raw materials needed by many manufacturers. The country has also made progress in recent years in research and development and in importing foreign technologies.

And, although overseas demand has been becoming weaker, domestic demand is a powerful force.

Adidas' decision to close its last wholly owned factory in China suggests that foreign textile companies may be looking to do business in other countries, said Ma Gang, an industry observer.

"When China starts to lose its advantages, it will have to find a new way out," he said. "Manufacturing original products will be the most practical option."

In recent years, many US and European multinational corporations have moved their factories to Southeast and South Asian countries, particularly Vietnam and Bangladesh. Those places' main attraction remains labor costs that are lower than those in China.

Since entering China in 1997, Adidas has opened more than 6,000 stores in that market.

The company's revenues in China, boosted by strong sales, increased by 14 percent in the first quarter of the year to reach $4.62 billion. Its net profits increased in the same period by 38 percent to $351 million.